SME businesses are expected to grow further in the UAE due to Expo 2020 related opportunities.
A simple unified value added tax (VAT) system is now a virtual "reality'' in the UAE and GCC wide due to signing of the VAT framework agreement by all the GCC countries. This will have great impact on the region's economic ecosystem, fiscal reforms process, where in businesses and investors are looking at the country/region with great interest, promise and anticipation.
VAT is fixed at a low 5 per cent unified rate with some exemptions and zero rated goods and services in some cases. With such a low rate of tax, it may have a marginal impact on the inflation in the region, and on consumer spending since some essential food items, education, health sector, residential sector, etc, are expected to be either zero rated and or will fall in the ''exempted'' category.
VAT is ultimately borne by the end consumer with suppliers (i.e. businesses) acting as collection agents for the tax authorities resulting in additional compliance costs.
The GCC region, UAE in particular, has no indirect taxation (especially consumption based taxes), and possesses a very business-friendly environment, which makes it a very attractive place to do business for international SME businesses. However, when compared to high rates of VAT applied in other countries, a rate of 5 per cent tax is by far the lowest.
The huge tourist inflows into the UAE/GCC from all parts of the world may see a temporary hit on their spending unless there are clear provisions for VAT rebate or cash refunds for tourists at the airport.
Economic benefits VAT
Besides additional revenue generation, it will promote trade across borders within the GCC and with the outside world, thus favourably impacting business environment despite political challenges. This will help in continued infrastructure spending in social sectors like education, healthcare, housing, etc, and with an increase in employment opportunities.
SME businesses are expected to grow further in the UAE due to Expo 2020 related opportunities, which will help them expand operations despite additional VAT compliance costs, which will cushion the impact.
Business impact and implementation challenges
What can be done in the interim i.e. managing the transition?
Implications of non-compliance
If not planned timely and wisely, some of the important areas can be completely overlooked, thereby inviting losses for missed Input VAT credits, delay fines, penalties, litigation, etc and interrogation from tax authorities, which may also lead to disruption in the smooth running of the businesses. So, VAT implementation needs to be approached in a structured way in time by business owners, relook at their commercial strategy, understanding its full impact (B2B & B2C), which will thus lay down a sound foundation for a VAT compliant framework, which will also help in streamlining operations.
SMEs should thus be aware of the risks and costs associated with the VAT implementation on its business model, processes and systems and accordingly work on it in a smooth and planned manner.
Not preparing in advance is thus not a good strategy so "being proactive'' makes a lot of SME business sense.
The writer is the administrative board member of IBPC, honorary director of Institute of Directors, UAE Chapter and Partner - Crowe Horwath. Views expressed by him are his own and do not reflect the newspaper's policy.